What If I Have a Car Accident During My Chapter 7 Bankruptcy Case?

A Chapter 7 bankruptcy is a great method for tackling debt,especially if your wages are being garnished. But what happens if you are in a car accident during your Chapter 7 bankruptcy case? Getting into a car accident during a Chapter 7 bankruptcy can cause a host of issues during a Chapter 7 case. You may be worried about whether you can keep insurance proceeds or whether you will owe money for the accident. This article will discuss those concerns and what happens after a car accident after filing bankruptcy. 

What is a Chapter 7 Bankruptcy?

A Chapter 7 bankruptcy case is the fastest and simplest bankruptcy chapter. Chapter 7 bankruptcy allows individuals to get rid of unsecured debt. Unsecured debts are debts that are not attached to any collateral. Some examples of these debts include credit card debt, medical bills, student loans and personal loans. 

To file Chapter 7 bankruptcy, individuals must qualify. The first step to qualifying is passing a means test. The means test stops individuals who could otherwise, afford to pay back their debt from getting their debt eliminated. The means test looks at an individual’s household income and compares it to the median household income in the state they live in. If the individual’s income is less than the state’s median household income, they automatically qualify for a Chapter 7 bankruptcy. 

If their income is more than the state median income, they will have to go to the second part of the means test. The second part of the means test looks at the filer’s income and expenses to determine if any disposable income is left over to pay back their creditors. If there is no disposable income leftover individuals can still file a Chapter 7 bankruptcy. If there is disposable income left over, they may need to file a Chapter 13 bankruptcy instead. 

Qualifying under the means test isn’t the only hurdle individuals considering bankruptcy have to worry about. Individuals must also determine if their property falls under a bankruptcy exemption.  A bankruptcy exemption allows individuals to keep certain property. When an individual files a Chapter 7 bankruptcy, all of their assets become part of the “bankruptcy estate.” 

Assets include things like household items, furniture, electronics, real property, and insurance proceeds from a car accident case. Any items that do not fall under an available exemption are at risk of being taken and sold off to pay back a filer’s creditors. The bankruptcy trustee is an individual, often an attorney  that oversees the filer’s case. They will seek out and take any property that is non-exempt to pay back creditors that are owed. 

Auto Accident During Chapter 7 Case

Although a Chapter 7 bankruptcy case is the fastest bankruptcy, the process can take up to six to nine months to complete. This is a long time and a lot of unforeseeable situations can arise during such time. One of the most common unforeseeable situations that typically arise is a car accident. A car accident in a Chapter 7 bankruptcy should not be taken lightly. In some cases, a car accident in a Chapter 7 bankruptcy can prolong the case as issues arise. If a filer gets into a car accident during their Chapter 7 case, they should notify their bankruptcy attorney, if they have one, as soon as possible. 

Post-Petition Insurance Proceeds

Individuals who are expecting insurance proceeds for a totaled car during a Chapter 7 bankruptcy case may need to turn over the proceeds to the bankruptcy trustee. If the vehicle was financed the filer may need to pay the insurance proceeds to the lender. Further, if there is no exemption left to protect the insurance proceeds, the filer may be required to turnover the funds to the trustee. 

Post-Petition Debt

Totaled motor vehicles with car loans often leave filers with another concern, whether they will continue to be liable for the car loan debt if there were not enough insurance proceeds to pay off the loan. So long as the car loan was taken out before the bankruptcy was filed and no reaffirmation agreement was filed, the filer will not be liable for the car loan. A reaffirmation agreement is a signed agreement between the filer and the car loan lender where the filer promises to repay the car loan even though they filed bankruptcy. Thus, the filer is reassuming responsibility for the car loan. 

Medical Bills

On the day a bankruptcy case is filed individuals provide the court with all of the debts they owe. Any debts that arise after the bankruptcy filing are called post-petition debts. Post-petition debts are not dischargeable. This includes medical bills, property damage, and personal injury claims by another party resulting from a car accident during the bankruptcy case. 

Medical bills incurred after the filing of the bankruptcy petition are post-petition debts and therefore, the filer remains liable. Generally, medical bills are usually covered by the insurance company, so most filers won’t have to worry about them.

Property Damage Arising from the Accident 

Any property damage arising from the car accident is a post-petition debt. Most insurance companies will cover the damage of property as long as it wasn’t due to drunk driving or other insurance voiding issues. 

Personal Injury Claim 

If the other party in the car accident was hurt, they may hire a personal injury attorney to sue the filer. Any personal injury claims against the filer is also a post-petition debt. Filer’s in this situation should notify their insurance company right away to see if they will defend the personal injury case on their behalf. 

Post- Petition Personal Injury Claim Not Property of the Bankruptcy Estate

Filers who are badly hurt in a car accident, can bring a personal injury action or hire a personal injury attorney to help them pursue the other party even though they are in bankruptcy. If the car accident happened after the bankruptcy case was filed, any personal injury claim will be deemed a post-petition asset. Post-petition assets are not part of the bankruptcy estate thus, the trustee has no control or right to them. 

What if Insurance Doesn’t Cover the Post-Petition Debts?

Unfortunately, debts acquired after a Chapter 7 bankruptcy filing cannot be included in the discharge. Thus, the individual will remain liable for any post-petition debts arising from the auto accident. Individuals who can’t pay back their post-petition debt will have to wait sometime before they can file another bankruptcy and receive a discharge. In rare cases, individuals may elect to not complete the second financial management course that is required by the court. When this happens, an individual’s case may close without a discharge. This can be beneficial if the individual wants to refile a new Chapter 7 case.  

In some cases, individuals may be able to file a Chapter 13 bankruptcy sooner but won’t be allowed to get a discharge for another four years. A Chapter 13 case can help an individual repay the debt they acquired during their Chapter 7 bankruptcy. A Chapter 13 bankruptcy will lump the debt into a 3-5-year repayment plan allowing the filer some time to pay the debt off. Individuals considering another Chapter 7, must wait 8 years from the original filing date to get a new discharge. 

Getting into a car accident during bankruptcy proceedings can cause a lot of concern in a Chapter 7 bankruptcy. It is important that individuals who have gotten into a car accident during their case consult with a bankruptcy lawyer and obtain proper legal advice as to what steps they should take. Individuals that may continue to be responsible for post-petition debts may be able to speak with a law firm about possibly settling the debt.